A Walmart store in Mexico City: Executives at Walmart's Arkansas headquarters allegedly covered up a $24 million bribery scheme perpetrated by its Mexican subsidiary.

Reuters

April 23, 2012

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Walmart isn't just the largest retailer in the U.S. It's also a commercial powerhouse and the largest private employer in Mexico, the jewel of its global business empire. However, Walmart didn't come to dominate the Mexican market without spreading around a little shady cash, almost certainly in violation of U.S. and Mexican law, according to a lengthy, blockbuster report in The New York Times. After Walmart learned about The Times' inquiries in December, it informed the Justice Department and Securities and Exchange Commission that it was opening an independent investigation into foreign bribery, without providing details. Now the details are out. Here's a brief guide to Walmart's big bribery scandal:

Briefly, what's the story?In 2005, a former commercial real estate executive at Walmart de Mexico (Walmex) blew the whistle on a massive bribery scheme that fueled the company's explosive growth in the Central American country by paying officials to speed up permits and ignore laws. Walmart dispatched its own investigators, who found evidence of more than $24 million in suspect payments, approved by Walmex's top executives but hidden from the Bentonville, Ark., home office. Presented with this evidence, Walmart buried the information, allowing the implicated Walmex general counsel to wrap up the inquiry and exonerate himself and his fellow executives.

What does Walmart say?In a statement, Walmart public-relations chief David Tovar says that the company is "committed to getting to the bottom" of the allegations inThe Times article, and more generally "committed to having a strong and effective global anti-corruption program in every country in which we operate." So "if these allegations are true, it is not a reflection of who we are or what we stand for."

Why is this such a big deal?First, the alleged bribery in Walmart's fastest-growing market violates the company's public commitment to maintaining the highest ethical and moral standards. Second, many of the people allegedly involved in the bribery scheme or cover-up are still with the company: Eduardo Castro-Wright, Walmex CEO from 2002 to 2005, and reportedly the driving force behind the rampant bribery, is now Walmart vice chairman; then–CEO H. Lee Scott Jr. is still on Walmart's board; and current CEO Michael Duke was in charge of all foreign subsidiaries in 2005. Third, although its own investigator informed top Walmart officials that "there is reasonable suspicion to believe that Mexican and USA laws have been violated," the company didn't inform U.S. law enforcement until The Times started poking around, five years later.

Did Walmart break any U.S. laws?"This looks like a slam-dunk case under the Foreign Corrupt Practices Act" (FCPA), which bars U.S. companies from bribing officials abroad, says Felix Salmon at Reuters. And as is usually the case, "the crime was bad; the cover-up was worse." Whether or not Walmart actually violated FCPA, it "most definitely violated the culture that the Justice Department has fostered" over the past decade, where companies are expected to self-report their violations, says Nathan Vardi at Forbes.

But isn't bribery common in Mexico?Yes, and in much of the rest of the world, says Tim Worstall at Forbes. So while "it looks as if there's something at least worth investigating under the FCPA" in Walmart's Mexico fiasco, "I would argue that that is a problem with the FCPA," not Walmex's practices. We may not like bribery, and we shouldn't accept it in the U.S., but corruption is the price of doing business in Mexico and many other countries. "This really is just the way of the world," and we either tolerate it or put our companies at a competitive disadvantage.

What happens next?The Justice Department "will be under tremendous pressure to demonstrate that there are consequences" for flouting the FCPA, says Forbes' Vardi. Otherwise, nobody will see the point in self-reporting their own violations of the law. It's bigger than just this Mexico scandal, says Reuters' Salmon. The Times' "report shows that corruption is marbled throughout Walmart's international operations, not only in Mexico but also in Asia," and "I'm quite sure that multiple extremely senior heads are going to roll."